4 Ways You and Your Business Can Benefit From CrowdFunding

posted Sep 19, 2012, 11:04 AM by David Khorram

Maybe it’s just the circles I run in, but crowdfunding has become a part of my daily vocabulary. Over the last year, I have obsessed over crowdfunding, following almost every major project out there. Our team has placed a big bet that crowdfunding will transform the way companies raise money. Apparently, we are not alone.Entrepreneurs and investors alike are abuzz on the topic, holding dozens of meetups and conferences to discuss the industry.

No longer is crowdfunding just for funding artistic dreams. Crowdfunding is beginning to fund sustainable businesses, in turn, creating jobs and boosting the U.S. economy.

President Obama and Congress showed their support for crowdfunding with the signing and passing of the JOBS ACT. Officially signed into law in April, the SEC is now mandated to make public solicitation legal, as well as allowing the general public to invest in private companies (both of which are currently illegal). While the SEC is still working on implementation of these laws, the wheels are finally in motion.

Like any innovation, crowdfunding has both supporters and detractors. The small business community has embraced the legislation with open arms, but more conservative investors feel that it may lead to a chaotic investment climate.

With that being said, here are 4 ways that I see the average entrepreneur greatly benefiting from the use of crowdfunding:

1. Reduces family friction.Crowdfunding reduces the often personal friction involved with raising money. On average, entrepreneurs raise $60 billion per year from friends and family. This process can be very tedious, with the potential to strain relationships. And the lack of transparency can make interested investors not so interested.

Gone are the days of an awkward conversation with your father-in-law, asking him to invest $10k in your startup. Now, entrepreneurs can make the process seamless by presenting their business to their friends and family in a more professional manner than asking for a check at Thanksgiving.

2. Reduces entrepreneurial risk. The risk of starting a company, only to find out that no one is interested in your intended goods or service, is greatly reduced with the use of crowdfunding. Explaining to your wife that you just blew your life savings on a product no one wants to buy can’t be fun — and neither can sleeping on the couch for the remainder of your marriage.

Fundraising from customers before you launch is the best litmus test as to whether or not your business has legs to walk on. In fact, prior to receiving your funds, many sites require that you meet the goals you set to ensure you can deliver on your promised reward. This first test ensures that before taking out bank loans, racking up your credit cards and draining your personal savings, you can gauge customer demand to see if there is a market for your product before you go all in.

3. Creates a marketing event.Sending people to a website with static information on it isn’t attractive to most people. However, being an active participant in a company’s success is. A crowdfunding campaign creates a marketing event that you can use to promote your company to interested backers and future customers

A successful crowdfunding campaign provides a story reporters can cover, an event people can become a part of that is bigger than themselves, and it creates anticipation that captures the attention of the followers — it provides a a story to follow, and a way for them to contribute to it. At Fundable, we recently launched a new 3-D conversion device. It’s one of the most affordable consumer-friendly 3-D gadgets on the market, and we’ve seen fantastic coverage of the launch of the device. Without crowdfunding, 3-D Vision would never have gotten the chance to share the product and story with such a large audience.

4. Provides social proof.Any investor wants to watch their investments do well, and the results of a crowdfunding campaign provide the business with a valuable asset: proof of customer demand or interest from other investors.

A rewards-based crowdfunding campaign helps create loyalty from customers, simply because they want to see something they were involved in succeed. An equity-based crowdfunding campaign will help substantiate investor support for a company without you taking the risk of writing the only check.

The success or failure of a crowdfund provides a good indicator to investors of whether or not a company will be successful. With positive results from a crowdfunding campaign, investors are not only more likely to invest, but also are more likely to invest more. In fact, we’ve gotten great feedback from several of our projects regarding investors that have come out of the woodwork after gaining visibility through their rewards-based fundraise.

I predict more and more entrepreneurs in all industries will start turning to crowdfunding to test the waters and raise funds. Will you be the next crowdfunding success?